FCA takes aim at bad broker behaviour

This year looks like the year that some of the more louche corners of insurance broking catches up with the world of 21st century work.

Lloyd’s ban on lunchtime drinking, announced last year, sent a chill through the traditionally booze-fuelled London market. And the first week of this year saw this straighter-laced tone affirmed when the FCA warned wholesale broking chief executives that failure to tackle poor non-financial behaviour will no longer be tolerated.

The ‘Dear CEO’ letter, which was sent out on 6 January in the regulator’s latest regulation bulletin, follows the extension of the Senior Managers and Certification Regime (SM&CR) and the conduct rules to insurance intermediaries in early December. The regime has already applied to insurers for just over a year.

The letter from FCA executive director of supervision, retail and authorisations Jonathan Davidson states that the approval process for senior managers will include an assessment of fitness and propriety. Failure to take “reasonable steps” to address non-financial misconduct could lead the FCA to determine that they are not fit and proper persons to run or be senior managers at a wholesale firm.

Firms and boards will be expected to take these assessments into account when considering the suitability and performance of senior managers and board members as well as those hoping to take on such roles

In addition, firms will be expected to have “strong” whistleblowing processes and appropriate incentive structures in place for those who want to expose poor conduct.

While the letter was addressed to the wholesale market, its message is “relevant” to all brokers, said a Biba spokesperson. Brokers should take the new rules “very” seriously, one senior compliance source told Insurance Times. 

“The FCA is saying we all need to pull our socks up,” they added. 

Others in the industry agree.

“The FCA must have seen something nasty to come out with this statement,” said compliance consultant Branko Bjelobaba.

New obligations on firms to keep disciplinary reports for as long as six years means that failures to tackle non-financial misconduct will have implications for senior managers’ future prospects, he said: “Individual behaviour is so much more important than it ever has been.”

Lloyd’s bubble

The problems that the FCA is seeking to tackle were most graphically highlighted by the recent Lloyd’s survey, which included the finding that one in 12 (8%) of respondents had witnessed sexual harassment over the previous 12 months.

But Ashwin Mistry, chairman of Midlands-based Brokerbility, believes that the poor behaviour uncovered in the Lloyd’s survey is not typical of the broking market as a whole.

“It seems to be in a bubble. We don’t see it here sitting 100 miles away,” he said.

And Biba said that this kind of non-financial misconduct has not been raised as a problem by the association’s own young broker ambassadors or members more widely, albeit with the caveat that this doesn’t mean that such incidents do not happen.

The FCA letter asserts that poor culture in financial services firms, which it identifies as the “key root cause” of recent major conduct failings within the industry, can “lead directly to harm” to consumers and others in the market.

This stress on firm-wide culture is important, said chief executive of Dart Compliance Jim Dart: “Where you have different teams and branches, culture is driven more by team leaders than the chief executive of the company.”

Mistry agreed: “While the board may have a position on a lot of behavioural and conduct issues, it gets diluted when it gets down to middle management. It gets lost in translation.”

Lack of diversity

The FCA identifies lack of diversity and inclusion, together with non-financial misconduct, as obstacles to creating an environment in which it is safe to speak up, with consequences on retaining talent. Bjelobaba agreed with the FCA’s contention that a more professional approach pays off. He said: “The quality of business that emanates from professional insurance brokers is much better.”

The new regime means human resources professionals, traditionally not prominent within insurance brokering, will become more important figures, said the senior compliance source, saying: “Compliance officers often now sit on boards. The same may happen with HR.”

But Dart suspects many firms are not worried about internal misdemeanours being picked up by a regulator like the FCA, that relies on desktop assessments rather than physical inspections.

“The failure is in each insurance firm but it is facilitated by a complete lack of concern that they are going to be caught,” he said, noting a recent conversation with a broker who had not been visited by the FCA for more than a decade.

“The broking world is not afraid that the FCA is going to come looking, because that isn’t what the FCA does. They [the FCA] haven’t got staff to do it.”

As an example of how enforcement should be carried out, Dart points to the RICS audit of members, starting 18 months ago, prompting a “massive” increase in compliance. 

The FCA will be holding a conference in March to share insights from the work it has done on how firms can transform their culture. But Mistry said that the message is already getting through.

“There is an acceptance that we have to take both conduct and behaviour seriously,” he said.